Hidden billions in tax reliefs revealed
The National Audit Office (NAO) has examined the cost calculations for non-structural tax reliefs which amount to £155bn per year. How many of these reliefs could be cut away in the 2020 Budget?
The NAO released the ‘The management of tax expenditures’ report on Friday which reviewed the costs of different types of tax reliefs and how value for money of the key reliefs can be measured.
What are tax reliefs?
Tax reliefs reduce the amount of tax a business or individual has to pay, and in doing so have a negative effect on the total amount of tax collected.
In 2018-19, the UK tax system contained 1190 different tax reliefs, of which 828 are regarded as a structural part of a tax, such as the personal allowance for income tax or the nil rate band for IHT.
The remaining 362 tax reliefs are not a structural part of a particular tax, but provide incentives for taxpayers to act in a certain way, such as R&D tax credits which encourage expenditure on research and development projects.
These non-structural tax reliefs are optional extras for the tax system and arguably add complexity while at the same time directing effort or funds towards social or economic objectives.
The NAO report calls these tax reliefs “tax expenditures”. Such reliefs are an important part of tax policy, but they are intrinsically variable costs as they can be removed or amended without changing the structure of the underlying tax.
HMRC currently reports the estimated costs for 85 structural tax reliefs and for 111 non-structural reliefs. It is committed to reducing the number of uncosted tax reliefs, but collecting the additional data required will take several years.
The cost of the 111 tax expenditures was estimated to be £155bn for 2018/19. This does not necessarily reflect the amount of tax collected if the tax reliefs were to be removed, as taxpayers would change their behaviour in response and perhaps switch to a different tax relief.
Top of the charts
The five largest tax expenditures by value are:
- CGT main residence relief: £26.7bn.
- Employee contributions to pension schemes: £20.4bn
- Zero rate VAT on food: £18.3bn
- Employer contributions to pension schemes: £17.4bn
- Zero rate VAT on new homes: £14.8bn
These top five would all be very challenging for a Chancellor to attack, although there are rumours of a restriction on the higher rates of tax relief for employee pension contributions.
The cost of entrepreneurs’ relief, which is widely tipped to be reformed in this year’s Budget, comes in at £2.2bn and placed 15 in the top 20 tax expenditures. This is only just below R&D tax credits (£2.3bn) and equally placed with the employment allowance, which will be significantly restricted in scope from 2020/21. Interestingly, the relief for traders not having to register for VAT when their turnover is under £85,000 is also costed at £2.2bn.
Could more of these middling tax reliefs be cut back in the March Budget?
Value for money?
The other side of the cost coin is the value each tax relief drives for the economy as a whole. Thus, determining whether a tax relief delivers value for money requires both the cost and the benefits to be measured. The NAO concludes that much more work could be done to evaluate whether particular tax reliefs are achieving their objectives.
John Cullinane, technical director of the CIOT, commented: “Unless they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be assumed to be value for money.”
This is an issue that the House of Commons public accounts committee has examined in the past and no doubt will come back to.
Meg Hillier MP, chair-elect of that committee, observed: “The Treasury and HMRC are still not serious about reviewing tax reliefs. Of those reliefs with policy objectives, less than a third have been costed, less than one in five have been assessed for value for money and few reliefs have been formally evaluated.
“The Treasury and HMRC must work better together by formally establishing their accountabilities and ensuring greater transparency. It is about time tax reliefs were given the same amount of attention as public spending.”